US Dollar Outlook:
- The US Dollar (through the DXY Index) has given up its positive aspects after the discharge of the July FOMC assembly minutes.
- Directional biases are troublesome to establish in each the DXY Index and USD/JPY charges as momentum indicators supply conflicting views.
- The IG Client Sentiment Index means that USD/JPY has a bullish bias within the near-term.
July FOMC Minutes Released
The extremely anticipated launch of the July FOMC assembly minutes proved to be a little bit of a disappointment – not less than for the US Dollar (through the DXY Index). The minutes contained no hawkish surprises, with one sentence standing out particularly: “Participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation.”
Recent knowledge factors recommend that latest Federal Reserve coverage changes are certainly having the supposed impression on mixture demand and inflation: the US economic system’s development trajectory has slowed; and the July US inflation report confirmed a 0% m/m studying.
The knock-on impact of the July FOMC minutes was a slight discount in fee expectations for the September Fed assembly. Odds of a 75-bps fee hike dropped from 51% yesterday to 46% at this time, suggesting that market individuals are taking the most recent communication from the Fed as affirmation of what was already identified: the tempo of fee hikes is because of gradual over the approaching months.
DXY PRICE INDEX TECHNICAL ANALYSIS: DailyTimeframe (August 2021 to August 2022) (CHART 1)
The positive aspects amassed by the DXY Index earlier at this time have since disappeared, with a second consecutive taking pictures star candlestick forming on the each day chart. The lack of follow-through to the upside might point out that the latest rally above the descending trendline from the July excessive (yearly excessive) and the early-August swing excessive is failing, and a renewed drop beneath the uptrend from the late-March and late-May swing lows might transpire. Momentum indicators are conflicting at current time, that means merchants will probably have to attend for decision round latest trendline breaks earlier than a directional bias will be ascertained; extra draw back from right here would improve the chances of a return in the direction of the mid-June swing low at 103.42.
USD/JPY RATE TECHNICAL ANALYSIS: DAILY TIMEFRAME (August 2021 to August 2022) (CHART 2)
The rally by USD/JPY charges in latest days above the descending trendline from the July excessive (yearly excessive) and the early-August swing excessive is in query as merchants promote the pair (as US Treasury yields soften) within the wake of the July FOMC minutes. A drop beneath the descending trendline might incite a return to the August low at 130.91, which was staved off final week. Like the broader DXY Index, momentum indicators are providing conflicting indicators, suggesting extra time is required earlier than a directional bias will be ascertained; vary buying and selling might in the end prevail within the near-term if US Treasury yields pullback whereas US equity markets rally.
IG Client Sentiment Index: USD/JPY RATE Forecast (August 17, 2022) (Chart 3)
USD/JPY: Retail dealer knowledge reveals 33.61% of merchants are net-long with the ratio of merchants quick to lengthy at 1.98 to 1. The variety of merchants net-long is 8.32% decrease than yesterday and a pair of.94% decrease from final week, whereas the variety of merchants net-short is 7.16% larger than yesterday and 21.08% larger from final week.
We sometimes take a contrarian view to crowd sentiment, and the actual fact merchants are net-short suggests USD/JPY costs might proceed to rise.
Traders are additional net-short than yesterday and final week, and the mixture of present sentiment and up to date modifications provides us a stronger USD/JPY-bullish contrarian buying and selling bias.
— Written by Christopher Vecchio, CFA, Senior Strategist